Legal Question in Real Estate Law in California

First, let me correct some of the assumptions in your post. If you have a first and second mortgage, both of which were used strictly for the purchase of the home (i.e., they were borrowed at the time you bought the home, the money went directly from the lender into escrow, and then directly to the sellers), then both loans are most likely covered by the anti-deficiency rules; meaning that if the first lender forecloses non-judicially, the second lender cannot sue you for a deficiency. This is a very, very fact-specific question, and the only way you can know for sure if the loans are covered by the anti-deficiency statutes is to have a qualified, experienced attorney review the loan documents, escrow documents, and the HUD-1 Settlement Statement. Who loaned the money is not relevant to any of these inquiries. It can be the same bank, or several different banks.

Your second assumption is backwards. If the loans were not used to purchase the home, or just the second loan was not used to purchase the home, and the first lender forecloses non-judicially, then the second lender can sue you for any balance due on the loan. They are what is referred to as a "sold-out second" in that the collateral for their loan is now taken by the first lender, but they still hold a promissory note signed by you promising to repay them the entire loan amount. The first, if they foreclose non-judicially, is prevented from suing for a deficiency. Again - these are general statements, and would absolutely require a fact-specific review before anyone can rely upon these statements.

Finally, in a short-sale, California has a new law that prohibits the first mortgage lender from ever seeking a deficiency judgment. This just went into effect, but ONLY covers first mortgages. Second mortgage lenders, in a short-sale, can pursue the borrower for the remaining balance UNLESS the bank gives the borrower a written waiver of the balance of the loan. In a short-sale, the borrower may have a taxable event as the result of forgiveness of debt - again it is very fact-specific, and the homeowner needs to check with tax counsel about that issue. I cannot speculate as to why people believe it will be wiped-out - unfortunately my mind-reading skills have faded over the years. Hope this helped, but please do understand that anyone considering foreclosure, short-sale or even deed-in-lieu of foreclosure needs to consult with a qualified, experienced attorney as EVERYONE's circumstances are different, and even the smallest fact can change the rules dramatically.

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I agree with Mr. Gibbs' excellent analysis, and would only add that borrowers who commit fraud or waste of the mortgaged property are not exempt from suit for damages suffered by the lender from those causes.